Last week we provided an overview of the House tax reform proposal. Later in the week the Senate released its version of the legislation.
Below we add comments to our blog post last week and indicate the Senate’s proposal. We have highlighted the Senate version when it differs from that of the House.
Income Tax Rates
There are currently seven income tax brackets. The House bill proposes four brackets, at 12%, 25%, 35% and 39.6%.
The Senate bill includes seven income tax brackets, at 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
Both the House and Senate bills would raise the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly.
Both the House and the Senate proposals would eliminate the personal exemption (currently $4,500).
Child Tax Credit
Under the House bill, the child tax credit would increase from $1,000 to $1,600 for a child under age 17. Also, the income level at which the credit phases out would increase from $75,000 to $115,000 for single parents and from $110,000 to $230,000 for married parents.
Under the Senate plan, the child tax credit would increase to $1,650. The Senate version would also make the credit available for children under 18. The extra $650 in tax credit would not be refundable. So, low income family that do not pay federal income taxes would not receive it. The Senate bill would increase the income level at which the credit begins to phase out to $500,000 for single parents and $1 million for married couples.
The Senate bill would allow a $500 nonrefundable credit for qualifying dependents other than qualifying children.
The House bill would create two $300 tax credits – one for nonchild dependents and another spousal credit if the spouses file jointly. These credits would be in effect for 5 years and they would be non-refundable.
The Senate legislation does not include a family tax credit.
Dependent Care Assistance Accounts
Under the House plan, parents will no longer be able to exclude from income up to $5,000 in a dependent care flexible spending account.
The Senate bill retains Dependent Care Assistance Accounts.
State and Local Tax Deductions
The House and Senate plans would eliminate these deductions.
The House bill would limit the deduction for property taxes to $10,000.
The Senate version would eliminate this deduction.
Under the House bill, taxpayers would be able to deduct the interest on new mortgages of up to $500,000. Existing mortgages would not be affected by the bill.
The Senate bill does not change this deduction.
Alternative Minimum Tax
Both bills would eliminate the AMT.
The House bill would repeal the federal estate tax in 2024. The exemption level would double to $11 million per person.
The Senate version would also double the exemption. However, the estate tax would not be abolished.
The current version of the House bill makes not changes to retirement plan such as 401(k) and IRAs.
The Senate version, however, would prohibit high income earners from making catch-up contributions to most qualified retirement accounts (excluding IRAs). There are other restrictions for participants in 403(b) and 457 plans.
We will continue to monitor the legislative process in both the House and the Senate.